Tenants take lead on development

During the boom, developers such as Peppermint Grove resident Glenn Zampatti dictated the cost of big blocks of land and the sheds to be built on them.

Not any longer.

As banks across the country ration funding, the developers are out. Instead the industrial occupiers are turning into developers.

Tenants are finding they are in an increasingly better position to develop and save on high rental costs.

Logistics, transport and security company
CTI Logistics
swooped on Zampatti’s property in Perth this past week, buying it for less than he paid in 2007 when it was still without development approval for two 10,000-square-metre warehouses.

CTI executive chairman
David Watson
says the listed company has plans to build a large logistics facility as part of its expansion in Perth’s resource-backed economy.

“Property developers are finding it hard to find bank funding, but when [owner-occupiers] say [the money] is for themselves the banks are more likely to support you – that’s what we have done."

Watson had been looking for land for a year but the cost was up to $400 per square metre.

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The purchase of Zampatti’s four-hectare block at Hazelmere cost $190 per sq m and that meant a development would stack up quite nicely for CTI.

Many traditional development groups such as ING Industrial are looking to offload land as they seek to secure yield instead of development growth, leaving owner-occupiers to take advantage.

Trucking and logistics company Linfox announced earlier this year that it had plans to build a $1 billion property portfolio within five years as a way of saving on its annual rental bill of $78 million and cutting out the landlord.

Linfox says the group committed to $270 million worth of development this year for its logistics division.

At the big end of town, developers such as Goodman Group have also noticed a shift in the marketplace. General manager of Australia Jason Little suspects some owner-occupiers are taking advantage of developers’ funding situation.

“For the big logistics groups, developing is more opportunistic than strategic," he says.

“I think the owner-occupiers are out there because a lot of developers couldn’t find finance and so tenants had to start looking at doing it themselves."

However, he says “the preference" was still for developers such as Goodman which now have the funding to carry out the requirements. “Most of the big groups do prefer the lease options because of their own capital requirements," he says.

Savills head of industrial James Condon says that the costs for owner-occupiers to develop are alluring.

“Given that yields, and hence the rent payable by the tenants, are above the costs associated with being an owner-occupier, we expect the owner-occupiers to continue to be a major player in the WA market moving forward," Condon says.

“This is predominantly being driven by the developers staying out of the market due to the cost of land."

Yields for prime industrial property are about 8 to 8.25 per cent, which ticks the boxes for the investor market.

Condon says that the internal rate of return over 10 years is more than 10 per cent and that “made sense for the tenants to be owner-occupiers".

Developing has now become CTI Logistics’ core strategy, especially because of high rents.

“Four years ago we were renting in Wetherill Park in Sydney but we left there because the rents were too high. Here in Perth it is the same – the rents are not softening," Watson says.

In Sydney, Colliers International Industrial director Eugene Evgenikos is seeing a definite swing towards owner-occupiers in the past few months.

He estimates that of the major industrial transactions in South Sydney this year, there are at least $60 million in due diligence or exchanged.

“All this activity is owner-occupier activity," he says. “These owner-occupiers have been methodical in picking the bottom of the market whilst funding liquidity has improved, albeit slightly."

Of the $235 million of major industrial properties transacted in 2009 throughout South Sydney, Evgenikos says one-third, on a dollar basis, of the purchasers have the intent and capability to owner-occupy the property they have acquired.

“Owner-occupiers are buying investment property and sitting on the income until the lease expires as they see value buying where the yield is less than the potential value of a building with vacant possession."